Blockbuster inc. just paid a dividend of $2 per share. dividends are expected to grow at a rate of minus 50% annually over the next three years. after that, it is expected that blockbuster will cease paying dividends forever. what is the fair market price for a share of blockbuster if shareholders require a return of 12%?
a) $2.21
b) $2.95
c) $1.61
d) $0
e) $1.47

E) $1.47

Explanation:

Hi, first we need to estimate the value of all future dividends, since last dividend was $2 and it´s going to grow at -50% every year, for 3 years and then stop paying dividends, the cash flows that we need to bring to present value are.

D(1)= $2*(1-0.5)=$1

D(2)=$1*(1-0.5)=$0.50

D(3)=$0.50*(1-0.5)=$0.25

And no dividends from then on.

Now, we need to bring them to present value in order to find the pair market price of this share, that is:

So, the price of this share is $1.47, that is E)

Best of luck

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